Friday, December 28, 2012

While I remain focused on mobile patent (and related competition) issues, I'm well aware that a Pennsylvania jury's shocking $1.2 billion damages verdict against chip maker Marvell (here's Marvell's statement) is the biggest patent litigation news during this last week of 2012. Theoretically that award could even be tripled for willfulness, in which case the damages award would exceed Marvell's market capitalization. I don't have an opinion on the details of that case, but just by looking at the numbers and considering the huge number of patentable inventions that go into a chip, I can't help but feel that it was an abdication of its discretion by the district court to allow Carnegie Mellon University to present its claims to the jury, which then supported them in their entirety -- because regardless of whatever CMU may have invented and whatever Marvell may have used, nobody in this industry could have a viable business in the United States if such damage awards were in line with the law.

By coincidence, Marvell's lead counsel, Quinn Emanuel's Kevin Johnson, was also on Samsung's team in the Apple trial. For a firm that claims on the front page of its website that its lawyers won 90% of the cases they tried, it must be almost disheartening to be on the receiving end of two billion-dollar patent damages verdicts within only four months of each other. Companies with a patent infringement problem should be realistic about how much a law firm can do for them. I don't know about the work QE did for Marvell, but what they have done and continue to do in the Apple-Samsung case is very impressive -- the problem is just that Samsung added its own design patent infringements (very costly under U.S. law) to Android's manyfold software patent infringements, and there was strong evidence of a strategy to copy Apple. There really is a lot of money at stake in Apple-Samsung: if Samsung could solve the whole Apple patent problem by paying a billion dollars, it would do so any day of the week. In the CMU-Marvell case, there's also a finding of willfulness, but again, the numbers just don't make the slightest sense. The Apple-Samsung award needs to be adjusted here and there, but the CMU-Marvell award must simply be tossed or slashed in order to protect the innovation economy against patent unreasonableness.

The cross-appeal of Judge Posner's Apple v. Motorola Mobility ruling is probably the best near-term opportunity for the Federal Circuit to address two pressing problems at once: the one of injunctive relief over FRAND-pledged standard-essential patents, and the one of reasonable patent damages (for SEPs as well as non-SEPs), a problem that this week's $1.2 billion lunacy highlights. I've always been much more interested in injunctive relief than damages questions because injunctions are the far more impactful remedy in disputes between major industry players. I've been opposing SEP-based injunctions for a couple of years, and I also focus on FRAND royalty calculation issues, but I'm still in the process of forming an opinion on how non-SEP damages should be calculated. Without a doubt, however, there's a need for improvement -- not only in the United States, by the way, even though the most spectacular patent damages awards tend to come down in that jurisdiction.

So without this representing a ringing and unconditional endorsement, but in light of the presently-heightened interest in patent damages and a need for constructive, rational debate, I wish to draw additional attention to a set of proposals that an interesting group of companies submitted to the Federal Circuit in the form of an amici curiae brief on the Posner appeal. Here's the document, and I'll talk briefly about the companies behind it and their proposals further below:

CME Group (Wikipedia: "CME Group Inc. [...] owns and operates large derivatives and futures exchanges in Chicago and New York City, as well as online trading platforms. It also owns the Dow Jones stock and financial indexes, and CME Clearing Services, which provides settlement and clearing of exchange trades.")

Nest Labs, a maker of learning thermostats that received a venture investment from Google (but states that "[n]either Google, Inc. nor Motorola Mobility, Inc. took any part in drafting this brief") and recently recruited Chip Lutton, Apple's former head of IP (who personally signed the brief)

You can read the details of their brief yourself, but let me highlight the fact that it advocates a fundamental departure from certain existing damages rules, in particular, the 15 Georgia-Pacific factors (by which Judge Posner also seems rather underwhelmed), which the briefs says "fail to provide meaningful guidance and are not a reliable methodology for calculating reasonable royalty damages", and the Entire Market Value Rule (EMVR), which Cisco and friends says "should presumptively be abolished". The brief is not anti-patent, but it's clearly the kind of submission companies make if they think that minor adjustments are insufficient and fundamental change is needed. Whether one agrees with this approach or not (again, I'm still learning and thinking about all of this), it definitely makes it an interesting read.

The Georgia-Pacific factors and the EMVR appear quite reasonable at first sight, but these amici curiae argue that "generalized methodologies currently used to calculate reasonable royalty damages lead to inconsistent and unreliable results because they are not sufficiently tied to the patent invention". The latter part of this shows what these companies would like to happen: they would like the courts to "focus on the value of the patented invention at the time of the design to a reasonable licensor and licensee", and wherever possible, such damages "should be capped at the incremental value of the patented invention over the next best alternative".

I don't think one can make an argument that the Georgia-Pacific factors or the EMVR are biased frameworks for patent damages. Theoretically, judges could use them as tools to prevent excessive damages claims to be presented to a jury, and in a perfect world with perfect juries, jurors could also apply those rules to the benefit of innovation. I believe Georgia-Pacific doesn't work well for FRAND royalties because simulating a negotiation between two parties would allow patentees to capture post-standardization hold-up value. Apart from that, this framework is not inherently unbalanced. There's something in it for everyone. It's even open-ended, a fact that Judge Posner has criticized. In the world in which we live, judges as well as (especially) juries are often misguided, even if they have the best intentions. These are complex cases that even industry experts with a strong business and technical background have a hard time figuring out. In light of that reality, the question must be whether a set of rules does or does not work -- a results-based approach. Something can be scientifically brilliant but not practicable. And that's what I believe the patent damages debate (including, as a subset with unique characteristics, the FRAND royalty debate) will mostly be about.

In this regard, it's important not to attach disproportionate weight to spectacular outliers like the CMU-Marvell verdict. This is a lunacy, it may be fixed by the district court itself in the post-trial proceedings, and if not, the Federal Circuit can still solve the problem. There are many patent trials in the U.S. every year, and one can't judge the system only by the outliers. That said, I have a lot of sympathy for those who look for rational ways to prevent those outliers from occurring in the first place.

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About Me

Florian Mueller is an app developer who used to be an award-winning intellectual property activist. His 30 years of software industry expertise span different market segments (games, education, productivity and infrastructure software), diverse business models, and technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof, except that he is long AAPL.) He is now developing games for smartphones and tablet computers.